The study of the functioning of the economy as a whole and also of how macroeconomic policies affect the economy.

Term

Macroeconomic policies

Definition

Government actions designed to affect the performance of the economy as a whole.

Term

Standard of Living

Definition

The degree to which people have access to goods and services that make their lives easier, healthier, safer, and more enjoyable.

Term

Economic Growth

Definition

A process of steady increases in the quantity and quality of the goods and services the economy can produce

Term

Unemployment Rate

Definition

Number of people unemployed / Labor force

Term

Inflation

Definition

Measures how fast the average price level is changing over time

Term

Monetary Policy

Definition

Determination of the nation’s money supply. Controlled by the central bank or, in the U.S., the Federal Reserve System (Fed)

Term

Fiscal Policy

Definition

Decisions that determine the government’s budget, including the amount and composition of government expenditures and government revenues

Term

Deficit

Definition

Occurs when government spending is greater than tax revenue.

Term

Surplus

Definition

Occurs when government spending is less than tax revenue.

Term

Structural Policy

Definition

Government policies aimed at changing the underlying structure, or institutions, of the nation’s economy

Term

Positive Analysis

Definition

Addresses the economic consequences of a particular event or policy, not whether those consequences are desirable

Term

Normative Analysis

Definition

Addresses the question of whether a policy should be used; inevitably involves the values of the person doing the analysis.

Term

Aggregation

Definition

The adding up of the individual economic variables to obtain economy wide totals.

Term

Gross Domestic Product

Definition

The market value of the final goods and services produced in a country during a given period

Term

Market Value

Definition

Used to aggregate the quantities of different goods and services into one measurement. More expensive items receive a higher weight than cheaper items.

Term

Final Goods or Services

Definition

Goods or services consumed by the ultimate user counted as part of the GDP.

Term

Intermediate Goods or Services

Definition

Goods or services used up in the production of final goods and services and therefore not counted as part of GDP

Term

Value Added

Definition

For any firm, the market value of its product or service minus the cost of inputs purchased from other firms

Term

Domestic

Definition

Only production that takes place within a country’s border

Term

Given Period

Definition

Counts only goods produced during the defined period such as a calendar year

Term

Consumption Expenditure, or simply Consumption

Definition

Spending by households on goods and services, such as food, clothing, and entertainment.

Term

Investment

Definition

Spending by firms on final goods and services, primarily capital goods and housing

Term

Government Purchase

Definition

Purchase by federal, state, and local governments of final goods and services

Term

Net Exports

Definition

Exports minus imports

Term

Nominal GDP

Definition

A measure of GDP in which the quantities produced are valued at current-year price (measures the current dollar valueof production).

Term

Real GDP

Definition

A measure of GDP in which the quantities produced are valued at the prices in a base year rather than at current prices (measures the actual physical volumeof production and is adjusted for inflation)

Term

Participation rate

Definition

Labor force / Population 16 and over

Term

Unemployment Spell

Definition

A period during which an individual is continuously unemployed

Term

Duration

Definition

The length of an unemployment spell

Term

Consumer Price Index (CPI)

Definition

Measures the average level of prices relative to prices in the base year. (For any period, measures the cost in that period of a standard basket of goods and services relative to the cost of the same basket of goods and services in a fixed year, called the base year.)

Term

Price Index

Definition

A measure of the average price of a given class of goods or services relative to the price of the same goods and services in a base year

Term

Rate of Inflation

Definition

The annual percentage rate of change in the price level

Term

Deflation

Definition

A situation in which the prices of most goods and services are falling over time so that inflation is negative

Term

Nominal Quantity

Definition

A quantity that is measured in terms of its current dollar value

Term

Real Quantity

Definition

A quantity that is measured in physical terms --for example, in terms of quantities of goods and services

Term

Deflating (a nominal quantity)

Definition

A process of dividing a nominal quantity by a price index (such as the CPI) to express the quantity in real terms

Term

Real Wage

Definition

The wage paid to workers measured in terms of real purchasing power(calculated by dividing the nominal (dollar) wage by the CPI for that period).

Term

Indexing

Definition

The practice of increasing a nominal quantity each period by an amount equal to the percentage increase in a specified price index (prevents the purchasing power of the nominal quantity from being eroded by inflation).

Term

Price Level

Definition

A measure of the overall level of prices at a particular point in time as measured by a price index such as the CPI

Term

Relative Price

Definition

The price of a specific good or service in comparisonto the prices of other goods and services

Term

“Shoe-Leather” Costs

Definition

The use of resources to economize on holding cash during periods of high inflation

Term

“Noise” in the Price System

Definition

Inflation obscures the information transmitted by prices and reduces the efficiency of the market system

Term

Nominal Interest Rate (market interest rate)

Definition

The annual percentage increase in the nominal value of a financial asset

Term

Real Interest Rate

Definition

The annual percentage increase in the purchasing power of a financial asset(equals the nominal interest rate on that asset minus the inflation rate).

Term

Fisher-Effect

Definition

The tendency for nominal interest rates to be high when inflation is high and low when inflation is low

Term

Diminishing Returns to Labor

Definition

This principle states that if the amount of capital and other inputs are held constant, then the greater the quantity of labor already employed, the less each additional worker adds to production.

Term

Frictional Unemployment

Definition

The short-term unemployment associated with the process of matching workers with jobs

Term

Structural Unemployment

Definition

Long-term and chronic unemployment that exists even with the economy producing at a normal rate

Term

Cyclical Unemployment

Definition

The extra unemployment that occurs during periods of recession

Term

Compound Interest ***

Definition

Government policies that affect the long-term growth rate by a small amount will have a major economic impact. ***

Term

Human Capital

Definition

The talents, education, training, and skills of workers. Workers with large stock of _____ are more productive than workers with less training.

Term

Physical Capital

Definition

Worker productivity depends not only on their skills (human capital) but on the tools (physical capital) they have to work with.

Term

Diminishing Returns to Capital

Definition

If the amount of labor and other inputs employed is held constant, then the greater the amount of capital already in use, the less an additional unit of capital adds to production.